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Quantitative Insight - Comparing GEM2 and GEM3: Portfolio Construction and Turnover

categories: Portfolio Management Analytics, Americas, EMEAI, Portfolio Construction and Optimization, Asia Pacific, PMA, Equities, Australia, Research Paper, SMITH Rachael, general

The methodological enhancements introduced in the new Barra Global Equity Model (GEM3) are designed to improve risk forecasts for optimized portfolios. In this paper, we investigate the turnover and forecasting accuracy of optimized portfolios generated using GEM3, and compare them with those generated using the model’s predecessor, GEM2. By testing various investment strategies during the period 2007-2011, we found no systematic difference in turnover; in fact, the GEM3 risk forecasts were found to be more accurate.

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